Private Equity at Work: Tennessee, Georgia Draw More Investment

Private Equity at Work: Tennessee, Georgia Draw More Investment

The Tennessee Valley is known for its gritty factories, soaring dams, Southern hospitality and mountain views.

It's not known for its hopping private equity scene.

But perhaps it should be.

Investors committed $7.7 billion in private equity through 53 transactions in Tennessee during 2013, putting the Volunteer State among the top 20 states in the nation. And not to be left behind, Georgia cracked the top 10 with $11.5 billion in private equity across 78 transactions, according to the Private Equity Growth Capital Council.

The council used data from industry analyst PitchBook to compile the list of states with the most private equity investment in 2013. Texas, California and Pennsylvania took the top three spots -- Texas secured $87.4 billion -- Georgia ranks 10th and Tennessee ranks 16th.

The Southern neighbors' high ranks are slightly startling, local experts say -- and a reflection of both a maturing private equity industry and the states' abilities to cultivate business-friendly environments.

Private equity has gained in popularity across the nation during the last 10 years, especially with investments between $20 million and $100 million dollars, Williamson said. Part of Tennessee's steady climb up the private equity ladder -- the state ranked 24th in 2012 and even lower in 2011 -- is driven by the nationwide growth.

"Twenty years ago [private equity] was a small thing that was a niche deal, and now it's a key centerpiece for activities," said Michael Brakebill, chief investment officer for the Tennessee Consolidated Retirement System. "There has been a huge change."

The Tennessee Consolidated Retirement System started investing in the private realm six years ago, and is authorized to commit as much as 3 percent of its $41 billion portfolio privately. So far, they've spent $443 million in private investments, Brakebill said.

"We sought to diversify the portfolio, both adding investment returns and diversifying our investment returns and lower the risk by adding private equity," he said.

It's a move many investors considered when the stock market stagnated. While private investments are volatile, they typically bring higher returns than the stock market and are often considered as a prime way to diversify portfolios, said David Smith, a partner at Lattimore, Black, Morgan & Cain.

Federal banking regulations discourage banks from investing in the high-risk world of private equity, Williamson added. The job of banks, regulators clearly say, is to make loans -- low risk, low return loans. Which left the door open for private investors. And as they turned to the private world, the industry flourished and grew nationwide. But Tennessee and Georgia's rise into the top states was never guaranteed.

"Private equity is not very conscious of geography," Williamson said. "It's a reflection, rather than a cause, of a good environment for people to build businesses. Money is more mobile than the company. And because money is mobile, it's going to find the best opportunity."

So $19.2 billion in private investment wouldn't have flowed into Tennessee and Georgia if there weren't worthy companies and worthy people based in the states, he said.

Nashville is a major hub for the health care industry, producing a handful of giant deals.

And Chattanooga tends to feed more bread and butter private equity deals into the state, like Quick Cue's sale to Open Table for $11.5 million, and North River Physical Therapy's sale to ATI Physical Therapy.

"Private equity dollars follow success," said Mike West, CEO and senior partner at BPV Capital Management, in Knoxville. "If good things are happening, there is momentum. Tennessee is rising up, and I'd expect it to continue to climb."

BPV just launched a new mutual fund on Tuesday by partnering with AJO, an asset manager in Philadelphia that manages almost $24.4 billion.

"The fact that a Tennessee firm has been able to partner with a $24 billion firm out of Philadelphia -- they could have partnered with anyone -- the fact that we landed that partnership says a lot about what is going on in Tennessee," West said. "At the end of the day, people follow successful endeavors and activities."